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Three Reasons Why New Businesses Fail

Monday, 25 December 2006

The Business Briefs series of articles takes you through the basics of developing and presenting a design idea, obtaining funding, protecting and licensing your intellectual property, and getting your ideas to market. This month, learn how to avoid the most common pitfalls that cause a startup business to fail. Attend any business school or small-business seminar and you will inevitably hear a presentation on the “Top Ten Reasons Businesses Fail.” Depending on the instructor and his/her life experiences and education, the list will vary. The Internet also is replete with individuals writing about the subject. But, in all the presentations and other sources, one statistic remains constant: about half of all small businesses fail within the first three to four years.

Since most of us can only remember three things when we read a story or hear a speech, we narrowed the top ten reasons for failure to what we will call the three Ms: (1) Money, (2) Management, and (3) Market. Some would argue there is a fourth M — Mistakes. We will not discuss failures of businesses that have been around for five years or more — just startups. Established businesses face additional challenges, including personnel.
Money
Initial capitalization is a problem in many instances. In their zeal to move a good idea forward, entrepreneurs often grossly underestimate the amount of capital needed, and for how long, when they get initial funds from fools, families, and friends. Even profitable ventures may fail if they run out of money and cannot expand.

This leads us to the next area, cash flow. If outlay continues to exceed income, something has to give. This is just a simple way to say the business has insufficient working capital or liquid assets. There may even be the head-in-the-sand act of ignoring the company’s financial position. Individuals also may just be poor money managers and lose control of their company through bad budgeting and even inadequate financial recordkeeping. In some instances, cash-strapped businesses will make a Faustian deal and pay exorbitant rates to get the capital just to keep the doors open. In the end, such desperate practices often hasten the demise of the business. And what about venture capital? A struggling business can forget about attracting such investors who only want “sure things.”

Management
It seems simple enough since you can download a basic business model from the Web, but many businesses may not have a well-developed business plan. The entrepreneur may be a brilliant scientist and thinker, or one who tinkers until things are just right like a chemist or engineer. These individuals are intelligent and know well their own disciplines that are crucial to the intellectual side of a business. But, they don’t know how to run a business or manage people. They operate on gut instinct and often fail to make decisions and act on them. Instead, the businessperson vainly hopes things will work out. They rarely do.

Then there is the matter of pride. Because they started the business with their intellectual capital, business owners often fail to seek professional assistance when needed. Failure to set realistic goals and deadlines, and procrastination are killers. Failure to consider and plan for economic or industry downturns can push businesses over the edge.
Marketing
This brings us to the third and, we believe, most overlooked area — marketing. Businesses either don’t know their market or overestimate by huge magnitudes their ability to compete in an identified market. Even if a market is successfully identified, it may change while the product/service is being developed. The world will not beat a path to your door just because you have a superior product or service. Contrary to popular belief, products don’t sell themselves and the appropriate marketing persons (firm) must be hired to push the product to market. And, believe it or not, there are times when too many sales are just as bad as too few. Failure to deliver promised product in a timely manner may mean no additional sales to good customers. A good and flexible marketing plan, and the execution of that plan, is critical to business success.
Don’t Bet the Farm
Without being too pessimistic, we offer one final piece of advice: plan ahead. There is an old Pennsylvania Dutch adage, “Too soon old, too late smart.” There is no such thing as a sure bet — that’s why the house has the odds in gambling. You are indeed gambling your future when starting a new business. On the positive side, for start-up businesses, the odds for success are better than beating the house in Vegas. But, before you jump to start a “can’t miss” business, make sure you think through all the contingencies and that you can live with the results when the business fails.

Finally, many of our most successful entrepreneurs have failed multiple times before getting their break and making it big. Every time they failed, they learned some new business lessons, but that’s the hard way to do it. Don’t be afraid to ask for early advice and to consider all the “what-ifs?”

About the Author
Ron Buckhalt is a respected colleague of the Technology Tree Group and works for the U.S. Department of Agriculture. Mr. Buckhalt has held a number of marketing and communications positions, and was CEO of his own communications firm.

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